Your Guide to Identifying Multibagger Stocks
In the world of stock trading, multibagger stocks are some of the most coveted yet elusive securities. By definition, multibagger stocks are shares that have the potential to provide exceptional returns to investors in the long term. Even the term "multibagger" is derived from the concept of multiplying one's initial investment several times over, resulting in a significant profit. For example, imagine that you bought a stock at ₹100, and its price goes up to ₹500. This is referred to as a five-bagger stock because it has yielded 5x profit. If the price goes up to ₹1,000, then it's a ten-bagger stock, and so on.
While there can be several reasons for such an exponential surge in the stock’s price, multibagger stocks are typically characterised by strong fundamentals, a solid business model and high growth potential. Read on to know more about multibagger stocks, how to identify and benefit from them.
Features of Multibagger stocks
- Multibagger stocks often start out with a low market valuation. It means that their stock price does not yet reflect their true growth potential. If you can recognise such stocks early in their journey, you get the opportunity to buy them at low prices and generate multifold returns in the future.
- Multibagger companies have a competitive advantage, such as a niche product, strong brand, or patent protection and are more likely to outperform their peers over the long term.
- Multibagger stocks don’t just have high revenue but are also able to generate a stable stream of income (preferably from diverse sources). Scalable operations are also telling aspects of several of the recently turned multibagger stocks.
Identifying Multibagger stocks
Simply knowing the meaning of multibagger stocks isn’t enough to find them. Identifying multibagger stocks requires extensive research, analysis and a thorough understanding of the company's business, industry, financials and management. These stocks can be found across different sectors and industries including technology, healthcare, consumer goods and financials. Here are some of the key factors to consider and evaluate.
Strong growth track recordThe past performance of a company’s stock is no guarantee of its future growth. However, companies that have consistently demonstrated strong financials and grown their earnings over several years are more likely to continue doing so in the future.
Fundamental analysis of the stockRun a qualitative and quantitative analysis of the company’s tangible and intangible aspects and get a holistic view of the stock’s performance and potential.
Quantitative AnalysisThis analysis focuses on evaluating a company's financial health, performance, solvency and growth prospects. The company’s financial statements such as balance sheet, P&L reports, income statement, price-to-earnings ratio (P/E ratio), debt-to-equity ratio (D/E ratio) and cash flow are utilised to carry out such analysis. Financial ratios, in particular, have proven to be quite effective in benchmarking the company's performance with the industry standards and comparing it with its peers. For example, a rapidly growing P/E ratio increases the probability of the share in consideration to become a multibagger stock. Similarly, a D/E ratio lower than 25-30% is a favourable indication.
Qualitative AnalysisAlthough numbers speak for themselves, they don’t always tell the whole story. The company’s policies and experience, stability of its management and leaders, the competence of its executives, its inherent business model and goals for the future are all equally valuable factors to consider while searching for multibagger stocks. Afterall, it is the management team that makes and executes decisions that will drive the company’s future performance.
Nature of the Company’s BusinessYour chances of finding a multibagger stock are higher if you look for them in high-growth sectors. For example, there is an intense focus lately on sustainable power (solar, wind, electric power), healthcare and futuristic technology areas such as artificial intelligence (AI). With favourable policies and strong backing in place, stocks from these sectors are more likely to generate multibagger returns.
Macroeconomic TrendsOther factors such as demographic changes, technological advancements or changes in government policy can have a major impact on a stock’s growth, as well.
List of Multibagger Stocks
Here’s a list of top 10 multibagger stocks in India that achieved this feat in FY 23
|Raj Rayon Industries||3,230|
|K&R Rail Engineering||1,950|
|Knowledge Marine & Engineering Works||478|
|Mufin Green Finance||270|
|Imagicaa world Entertainment||254|
It is a common misconception that landing a multibagger stock is an act of luck. As you can now see, by understanding the meaning of a multibagger stock and the criteria to identify it, the process requires detailed due diligence on your part. It also requires a fair amount of patience since most stocks turn multibagger over a period of time that can be anywhere between 3-5 years. Timing your exit is equally important to avoid missed higher returns and loss of potential opportunities.